Fed gives Euro safety net; US markets soar
The Federal Reserve announced Wednesday a coordinated effort with several international banks to provide teetering Europe with easy cheap and easy credit.
In Fed language, it has “agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.”
Translation: The Fed has lowered the cost of borrowing for the European Central Bank (ECB).
The ECB simultaneously announced,
The ECB will regularly conduct US dollar liquidity-providing operations with a maturity of approximately one week and three months at the new pricing. The schedule for these operations, which will take the form of repurchase operations against eligible collateral and will be carried out as fixed-rate tender procedures with full allotment, will be published today on the ECB’s website.
Translation: The ECB will now start borrowing money from the Fed for the purpose of lending to its member states.
Meanwhile, US markets saw their biggest gains in over two years, assuming that the Fed’s Euro-propping has made markets safer. But Forbes’ Steve Schaefer squints,
While the effort to provide more liquidity may temporarily soothe the symptoms of Europe’s debt crisis and allow financial institutions easier access to funding, it does little to address the underlying roots of overburdened governments that need to be propped up while they drastically cut spending.
The Fed’s salvation of the ECB looks a lot like its rescue of US banks in ’08. Expect this market rally to be temporary. If the EU gets a fiscal union, this may change. May.
Interesting, however, is the cut-off date for this agreement: February 1, 2013.